Oktober 2010

IZA DP No. 5284: Bonus Payments, Hierarchy Levels and Tenure: Theoretical Considerations and Empirical Evidence

revised version published in: Schmalenbach Business Review, 2012, 64, 101-124

Using data on executive compensation for the German chemical industry, we investigate the relevance of two theoretical approaches that focus on bonuses as part of a long term wage policy of a firm. The first approach argues that explicit bonuses serve as substitutes for implicit career concerns. The second approach claims that bonuses are used as complements to an executive's internal career. Our data show that bonus payments are mostly prevalent among senior executives at higher hierarchy levels and rather for management jobs than for jobs in research and development. This is true for the whole chemical sector as well as for single large corporations. The findings indicate that the two theoretical views are not mutually exclusive, but are both relevant in practice.